Estate Planning 101: Definition, FAQs And Getting Started

Estate planning might not be at the top of your to-do list, but neglecting it could be a big mistake. In this article, we explain what an estate plan includes and how to make one. Read on to secure your financial legacy, protect your loved ones, and gain peace of mind.

What Is Estate Planning?

Estate planning refers to the legal documentation that determines what happens to your assets and obligations after you pass away or become incapacitated. An estate plan may include a will, trust, power of attorney, selection of beneficiaries, life insurance or other legal documents.

The purpose of an estate plan is to ensure your assets and affairs are managed and distributed according to your wishes. If you don’t have one, a probate court could decide how to manage your estate for you, which may create unnecessary tax liabilities and leave assets in the wrong hands. Consequently, the sooner you create an estate plan, the better.

Who Needs An Estate Plan?

Many mistakenly assume that estate planning is just for the wealthy. However, even if you don’t own much, you may still want to determine how your property is distributed once you’re gone. Plus, estate plans can address many other concerns that apply to most people, such as guardianship over minor children and health care decisions.

As you decide what to include in your estate plan, consider any assets, financial accounts, life insurance policies, debts, health risks, medical conditions, dependents, beneficiaries, charitable causes you support, and other potential factors.

Here are the different parts that can make up an estate plan:

Will

A will is a legal document that establishes how your assets are to be distributed upon your death and who should care for any minor children, dependents, or pets once you’re gone. It provides a basic framework for your estate plan.

If you haven’t already, create a will with the help of an attorney or on your own.

Trust

A trust is a legal arrangement by which you (the trustor) transfer assets to a trustee who holds and manages them for the benefit of beneficiaries. It can specify how and when assets are to be distributed (for example, gradually over time or all at once when beneficiaries reach a certain age).

A main benefit of trusts is that they often avoid probate court, leading to faster, more private, and more tax-efficient asset transfers.

Beneficiaries

Your estate plan should specify beneficiaries for any life insurance policies, trusts, retirement accounts, bank accounts, investments, real estate, and other assets. This minimizes confusion and conflict among potential heirs, paving the way for a smoother experience for all.

Power Of Attorney

A power of attorney (POA) is a legal document that gives someone else (aka an agent or attorney-in-fact) the authority to act on your behalf. For example, they may be authorized to make decisions about your finances, property, or medical care under certain circumstances.

Many estate plans include durable POAs, which let agents manage your affairs if you become unable to do so on your own (for example, due to sickness or age). This avoids leaving such matters to a court, which can be costly, time-consuming, and unaligned with your wishes.

Should You Work With An Estate Planner?

Consider hiring an estate planner to help prepare your estate plan. They can ensure it complies with state law, minimizes your tax burden, and is executed according to your wishes.

Before choosing an estate planner, verify their professional background and licenses, look up reviews from their past clients, and consider their experience with estates similar to yours. After all, the management of your estate is a serious matter. Only hand it over to someone you trust.

Estate Planning Checklist

Here are the main steps involved in estate planning:

1. Take Inventory Of Your Assets

First, you must determine what your estate includes. To do this, list out any of the following:

• Tangible assets: real estate, vehicles, personal items
• Financial assets: bank accounts, investment accounts, retirement accounts, insurance policies, annuities
• Business assets: business ownership stakes, commercial equipment, inventory
• Intellectual property (IP): royalties, patents

2. List Your Debts And Liabilities

When you pass on, any outstanding debt will become the responsibility of your estate, including:

• Mortgages
• Credit card debt
• Personal loans
• Auto loans
• Medical bills
• Student loans
• Unpaid taxes
• Utility bills
• Business debts

3. Decide Which Legal Documents You Need

Depending on your needs, some estate documents may serve you better than others.

For instance, you may choose to put your home in a living trust if you value the privacy that comes from avoiding probate. Conversely, you may prefer to list your home in a will because it comes with fewer upfront legal costs and it’s easier to change.

Other estate documents to consider include a power of attorney to direct your financial or medical affairs and a designation of guardians for any minor children or dependents.

4. Select Beneficiaries On All Policies

Many retirement plans and insurance policies let you name beneficiaries.

For other assets, it’s best to specify beneficiaries in a will or trust. Don’t leave any assets unassigned and regularly review your designations to keep them up to date. Beneficiaries can include family members, friends, or charities.

Consider also naming backup (or contingent) beneficiaries in case your first choice dies before you do or cannot accept the asset.

5. Choose An Executor

An estate executor is the person you designate to carry out your will’s instructions and manage your estate after you die. Among other things, they file your will with the probate court, ensure any outstanding debts are paid, and oversee the distribution of assets to beneficiaries.

When choosing an executor, consider their reliability, financial competence, availability and willingness to serve. You want someone you can trust. That’s why many choose close family members or friends. However, you can choose nearly any adult in good standing with the law, including professionals.

6. Create Your Documents

Carefully draft your will, trust, power of attorney, and any other estate documents. Try to address every financial uncertainty, including to whom you will bequest your assets (and how). Also leave instructions for the care of any minor children, dependents, or pets and your own care should you become incapacitated or unable to make important health care decisions.

Have a professional estate planner review your estate plan to ensure it covers all your bases, complies with state law, and has the necessary signatures to be legally binding.

7. Provide Copies Of Everything To Your Executor

Once your estate plan is complete, give a copy of it to your executor. This not only helps prevent it from getting lost but also alleviates any doubt that your estate plan exists and ensures the executor is well-prepared to carry it out when the time comes. 

8. Update Information When Needed

Regularly review your estate plan to ensure it’s up to date. This is especially important after major life events, such as a marriage, divorce, birth of a new child, death of a beneficiary or executor, job loss, or getting a new job.

For example, if you get divorced and remarry, you may want to change the beneficiary on assets assigned to your former spouse to your new one. Similarly, if your spouse dies, you may want to designate a new one in their stead.

Even if you don’t experience a major life change, it’s a good idea to periodically review your estate plan since laws affecting it may have changed.

FAQs About Estate Planning

Here are answers to frequently asked questions regarding estate planning:

What is probate?

Probate is the legal process by which your estate is administered in court according to your will. First, the executor files your will with a probate court. From there, your estate is inventoried, appraised and used to pay off any outstanding debts before it is distributed to beneficiaries.

Do I have to work with a lawyer to create an estate plan?

No, you don’t need to work with a lawyer to create an estate plan. However, it is highly recommended, especially if your estate is complex. A lawyer can provide valuable guidance on structuring your estate plan and help you avoid costly mistakes.

Alternatively, consider community or online DIY legal services, which can provide professional estate planning advice for little to no cost.

What’s the difference between a will and a trust?

Though often used in conjunction with one another, a will and a trust are two different estate planning tools. The former is a legal document that outlines how you want your assets distributed and affairs handled after your death, while the latter is a legal arrangement by which you authorize a trustee to hold and manage your assets on behalf of beneficiaries.

While every estate plan should include a will, you may also want to create a trust to avoid probate court, delegate management of some assets while still alive, or distribute assets in complex ways.

What is the role of an executor?

An executor is responsible for carrying out your will. Among other things, they file your will with the probate court, notify beneficiaries, inventory the estate, handle any outstanding debts, and manage the distribution of your assets.

The Bottom Line

If you don’t have an estate plan, now is the time to make one. You never know what the future brings, so it’s best to make your wishes known while you can. Otherwise, you leave your assets and affairs at the discretion of a probate court, which may not handle them as you would. 

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